The role of the board in crisis management

October 2021  |  FEATURE | BOARDROOM INTELLIGENCE

Financier Worldwide Magazine

October 2021 Issue

Crises are inevitable. From global pandemics and natural disasters to data breaches and financial wrongdoing, companies and their boards may face crises on a regular basis. Any sudden event that threatens a company’s financial performance, reputation or relations with key stakeholders has the potential to become a full-blown crisis in short order.

When the stakes are high and scrutiny intense, the board has a unique role to play in crisis response. There are actions boards can take and questions they can ask to reassure themselves that the company is adequately prepared to face impending disaster.

In a crisis, boards should have predefined roles but be flexible in their approach, so they can make effective decisions based on shifting circumstances. They should already know what is expected of them before a crisis hits, and be united in their response, working toward the same goals as the executive team.

Of course, it is important to understand that the circumstances of each crisis are different. “A crisis response can be triggered by a sudden and unexpected threat to a company’s core business or brand,” says Yvette Ostolaza, a partner at Sidley Austin LLP. “Beyond that, each situation and the corresponding role of the board is different. For example, a crisis could surround alleged misconduct by senior executives. Obviously, in that case the role of the board is to quickly take steps to assess the allegations, as well as understand and address the scope of any alleged conduct and the impact on the company.

“Other crisis circumstances may originate from outside the company in which case the lines of responsibility and communication between the company’s board and its senior executives may be different,” she adds.

To prepare for a crisis, companies need to install board members with the insight, experience and capability to advise on risk management and provide meaningful governance oversight. The board can provide tremendous value in helping a company return to business as usual, and in identifying and analysing underlying issues which may have led to the crisis or hampered the response.

The intersection of risk and crisis

Given the vast range of possible crises which could engulf an organisation at any time – both preventable and unpreventable – companies must have carefully designed risk management processes in place. In the event of a crisis that emerges gradually, for example, such processes can act as an early warning system, allowing the company to avoid an extreme version of the problem by taking corrective action before it spirals.

But not all crises emerge gradually. ‘Black swan’ events, such as the coronavirus (COVID-19) pandemic, highlight the importance of better crisis preparedness. Over the course of the last 18 months or so, those businesses without a crisis management plan may have suffered more than necessary. But even businesses that did have contingency plans were largely unprepared for the unexpected impact of COVID-19.

Prevention should be the main focus, but this is not always possible, as some crises arise with little or no warning. Irrespective of the genesis of a crisis, companies must be able to call on a strong crisis management plan.

According to the National Association of Corporate Directors, almost 50 percent of board members feel that their focus on known risks was a barrier to preparing for threats that may be hard or impossible to predict. Fewer than 20 percent felt confident that management could handle these unforeseen risks. Instead, crisis management planning could be improved by focusing on frameworks which allow decisions to be approved, implemented and communicated quickly and effectively. Strong decision making helps organisations to move forward during a crisis.

Ultimately, boards cannot afford to be caught off guard. “Unfortunately, and ironically, boards are thrust into crisis mode themselves when emergencies erupt because they are often ill-equipped and ill-prepared or simply do not have the time to meet the oversight obligations required to prepare for and navigate corporate crises,” explains Harlan Loeb, executive vice president at Argyle Communications. “This is especially troubling since governance oversight organisations have concluded emphatically that crisis and reputation risk oversight is the exclusive province of the board.”

Despite growing awareness of crisis management measures, the efforts of many companies continue to fall short. According to a recent PwC survey, only 37 percent of respondents said their board’s crisis expertise was good or excellent, 57 percent said they thought the board understood their own company’s crisis plan very or somewhat well, and crisis management was the lowest of the 10 areas in which executives assessed the board’s knowledge.

“While these results are alarming on their own, they present an even more concerning picture when coupled with an evolving trend: shareholders increasingly are using litigation to target directors for alleged reputational harm to the company,” says Robert Gemmill, senior vice president & general manager at Argyle Communications. “Thirty-nine federal securities lawsuits were filed from June 2019 to June 2020 alleging director accountability for reputational harm – a 60 percent jump from the prior year.”

When boards are not up to the task, catastrophe may not be far away. “Too often, boards comprise well-compensated and well-intentioned directors who are too ill-equipped and time-starved to play a meaningful oversight role on crisis and reputation risk governance,” suggests Mr Loeb. “The Purdue Pharma fiasco serves as a vivid example of a brutal enterprise collapse when ‘absentee’ directors are profoundly ill-equipped to challenge leadership. With Purdue, directors placed in executive roles might have sidelined the Sackler family and the company may have avoided bankruptcy.”

When a crisis emerges, regardless of its origin, boards will come under heightened scrutiny and pressure from external sources. They will need to make quick decisions, take decisive action, and communicate clearly and regularly with stakeholders and the C-suite.

Planning ahead

It is imperative for boards to ensure that crisis management plans are in place long before disaster strikes. Boards must work proactively and collaboratively with all members of the senior management team to evaluate qualitative and quantitative risk, and to stress-test worst-case scenarios and readiness options.

“Because of their fiduciary duty to protect the interests of the company and its shareholders, a board should consider oversight of risk management and crisis preparedness among its priorities,” says Ms Ostolaza. “The first step is to clearly define what specific business circumstances are likely to trigger a crisis and what teams will be responsible for taking the lead in responding to a specific issue. This essential step is deceptively difficult as each company and industry has different risk factors.

“Companies must take a broad view of risk and consider what types of crisis events could arise and are most likely – or if they arose – most catastrophic, and from there identify the key persons to involve in managing the risk, and the team and resources they will need,” she continues. “Identifying the likely team on an issue-specific basis can help the crisis response to be put into action quickly.”

The pandemic has taught companies of all sizes many valuable lessons, and though no two crises are exactly the same, it would be prudent for companies to develop a crisis playbook that provides an opportunity for collaboration between the board and executives, which can then be disseminated to appropriate levels of personnel throughout the organisation.

But when turning to a set playbook, there is a need for some caution. A playbook may not outline an appropriate response to a dynamic, constantly evolving crisis, for example. It may be overly prescriptive, or draw companies into a false sense of security. “Given the dynamic and unpredictable nature of all crisis situations, organisations should be very realistic about the applicability of a playbook,” warns Ms Ostolaza. “Even the best playbook will not account for the inevitable turbulence of a true crisis. We are seeing playbooks develop in the cyber security breach or ransomware attack areas, for example.”

When drawing up the company’s crisis response plans, efforts should be made to determine the roles and responsibilities of the board in advance, so that crucial time is not lost in the event of a crisis. “It is most effective, prior to a crisis emerging, for the board to set expectations and work with management to build consensus around a clear crisis management policy,” says Ms Ostolaza. “An effective component of a functioning plan is a clear escalation model setting out different levels of a crisis, and what triggers necessitate board-level intervention.

“The crisis plan should include an escalation path that ends with the board and includes both inside and outside counsel at early stages for privilege reasons,” she continues. “Everyone in the organisation should understand and ‘own’ their roles in the communication and escalation path. Whether there is insurance the company should purchase is part of the analysis.”

Communication and coordination

In a crisis, the board should play a supportive role, supplementing the work of the C-suite. The decision-making process must be collaborative. Constant communication between the chief executive and the board is critical. The chief executive must keep the board informed as events unfold. He or she should also engage the board in evaluating alternative courses of action, gaining the benefit of the board’s collective experience at handling past crises.

Rather than simply rubber-stamping management proposals, a board should draw on its wealth of experience and expertise to offer viable options and provide insights that management may have overlooked. In any crisis, individual board members need to be up to date on key topics so they can bring additional insight when discussing problems and potential solutions.

“In many crisis situations, it will be appropriate for management to manage the crisis response, while keeping the board well-informed so that it can provide appropriate oversight,” notes Ms Ostolaza. “While it can be difficult to resist the temptation to ‘jump in’, care should be taken not to unduly interfere with the leadership team as they work through what can be difficult business issues in a short time frame.”

Post-crisis reflection

Once the crisis has passed, the board should conduct an incident post-mortem to analyse the details. Why did it happen? What was the impact? What actions were taken to mitigate and resolve the incident? What should be done to prevent it from happening again? The post-mortem should be a blameless, nameless process – purely a chance to learn about and improve on operational processes.

According to Mr Gemmill, in the post-crisis period, it is also essential that boards ensure momentum is maintained throughout the reputation recovery and transformation period, and that they keep a keen eye on new risks that organisations rarely anticipate. “Boards must anticipate compounding reputational risks before they metastasise across other areas of the organisation,” he says. “This requires active stewardship of corporate reputation with vigilance, commitment, and a stakeholder-facing mindset.

“Maintaining public confidence and trust on issues proves indispensable to prevent crises that otherwise will devalue a company’s reputation – and, consequently, its market value. Boards also should measure their own performance on rebuilding trust and meeting stakeholder expectations,” he adds.

Part of this process entails assessing and addressing company culture. “This is a tough assignment and the board members should be prepared to ask hard questions and gather information that may be difficult for the organisation,” says Ms Ostolaza. “Often, a crisis can mean that there are deep-seated issues within the organisation’s culture that are inconsistent with that organisation’s stated values. For example, even the most well-intentioned company can develop a culture or subculture of risky behaviour. The board’s experience, independence and objectivity is well-suited to root out and address the issues and then drive real positive change.”

Going forward, companies, and their boards, will be under mounting pressure to do better. “With public demands for greater transparency, attention to environmental, social and governance (ESG) factors, and shareholder expectations surrounding societal issues, the reputational risks confronting companies and their directors are more numerous than ever,” notes Mr Loeb.

Whatever crisis grips an organisation, the board has a crucial role to play in guiding it out of dangerous waters. Though crisis management requires input from many different actors, the role of the board may ultimately determine whether the company sinks or swims.

© Financier Worldwide

BY

Richard Summerfield